Transport Committee on Feb. 12th, 2013

[The Chair, Conservative, Larry Miller]

I call our meeting to order.

This is just a reminder that this meeting is televised.

I'd like to thank Minister Lebel, Mr. Langlois, and Ms. Gibbons very much for being here. We look forward to your presentation first, and then I'm sure you're looking forward to questions.

With no further ado, Mr. Lebel, I'll turn it over to you.

[Denis Lebel, Conservative, Minister of Transport]

Thank you very much, Mr. Chair.

Members of the committee, I am very happy and honoured to be here with you.

Mr. Chair, thank you for having me here today to speak about Bill C-52, the Fair Rail Freight Service Act.

I am joined by Annette Gibbons, director general, surface transportation policy, and Alain Langlois, senior legal counsel, modal transportation law, with Transport Canada.

Bill C-52 is a very important milestone for our rail industry. This legislation will help ensure that railways and shippers work together to accomplish a shared goal to improve rail freight service in Canada. It will help shippers expand their growth and their businesses, while ensuring that the railways can manage an efficient rail shipping network for everyone.

As this committee knows, rail shipping is extremely important to our country's economy. Some 70% of our surface freight moves by rail. A strong and effective railway-shipper relationship is essential, which is why our government committed to table this important legislation. It will support job creation, economic growth, and long-term prosperity in Canada.

I won't dwell too long on the road that led us to where we are today, but I think it's important nonetheless to touch on it briefly.

In 2008, our government created an independent committee to review the rail freight services in Canada. The committee carried out an in-depth study on rail freight transport. It concluded that there was an imbalanced relationship between the shippers and the railways, and that the situation needed to be rectified by leveraging the shippers' influence.

The committee recommended using service contracts as a commercial tool in order to provide a clear framework and a better predictability and reliability of freight services. In March 2011, our government accepted this commercial approach put forward by the committee. We also made a commitment to table Bill C-52 to ensure that Canada has the rail system that it needs to support a strong economy.

Most importantly, I'm confident this bill will pave the way for better commercial relationships between railways and shippers, which is ultimately the best outcome for everyone.

It is essential for the committee to understand why this legislation is necessary. We are not dealing with the normal free market. The reality is that many shippers have limited choices when it comes to shipping their products. It is therefore necessary to use the law to give shippers more leverage to negotiate service agreements with the railways.

The intent is to create the conditions that will allow for successful commercial negotiations that would normally be possible in a free market. Ideally the legislation will never have to be used.

Bill C-52 was developed in close consultation with both shippers and railways. We consulted widely and listened carefully to the input we received. Multiple sectors, including forestry, agriculture, mining, and energy, came forward to offer their views, as did the railways.

It was important to take the necessary time to carefully consider all of these complex issues and to develop intelligent and responsible legislation.

Most fundamentally, Bill C-52 creates a strong incentive for shippers and railways to negotiate service agreements commercially. It gives shippers the statutory right to a service agreement with the railways, and it will require a railway to make an offer to a shipper within 30 days of receiving a request for a service agreement.

Should contract negotiations fail, shippers could turn to the Canadian Transportation Agency to request that an arbitrator impose one. The agency is a regulatory body renowned for its expertise. The agency already manages several other arbitration and dispute resolution processes.

In order to access arbitration, the shipper needs to demonstrate that he or she made the necessary efforts to come to an agreement and that a notice was served to the railway company 15 days before the request for arbitration.

While this is a low threshold to trigger arbitration, it does require the parties to attempt to negotiate an agreement on their own before going to the agents. The shipper will be in the driver's seat. He gets to trigger arbitration, identify the type of service desired, and frame the issues to be addressed in front of the arbitrator. Both the shipper and the railway will then provide submissions to the arbitrator with their views on what the agreement should include.

Through an interest-based process, the arbitrator will have to consider the interests of both parties when establishing an agreement that is commercially fair and reasonable. The arbitrator will have to consider the shipper's transportation requirements as well as the railway's obligation to serve all shippers. The arbitrator will have the flexibility to determine what service elements are fair and reasonable in the particular circumstances of each case. There is no one-size-fits-all solution to these issues because every shipper is different.

It is essential that the arbitrator have enough flexibility to establish an agreement that makes sense for each unique situation. The arbitration process will benefit shippers because it will be fast, only 45 days, and the imposed contract will be binding and non-appealable.

To enforce these arbitrated service agreements, Bill C-52 sets out administrative monetary penalties. If the agency confirms that a railway company violated the arbitrated service agreement, it could fine the company a maximum of $100,000 per violation. This threshold is four times higher than the other existing penalties. The penalty would be applied to each violation. Therefore, if there are multiple violations of the arbitrated service agreement, the cumulative fine could reach hundreds of thousands of dollars.

This is a considerable monetary penalty for railway companies who do not respect their commitments. What I am proposing is different from the penalty system that the shippers put forward. They asked the government to give the arbitrator the power to establish a penalty system within the service agreement, therefore allowing them to be compensated later if the railway company didn't provide the services promised.

We studied this proposal very closely, but it entailed significant legal issues which made it inapplicable.

First, punitive penalties are not enforceable in commercial contracts. It would simply be unprecedented to have a regulatory agency impose pre-established penalties. Regulatory agencies address breaches of legislation after they take place, not before.

Second, such a penalty regime would disadvantage shippers by limiting their right to sue the railway in court for real damages after a service breach.

Finally, it would be an enormously complex and time-consuming task for an arbitrator to predetermine a penalty for every different kind of service failure before it happened.

For all these reasons, I'm proposing administrative monetary penalties because they will achieve the same outcome for shippers: a strong financial consequence to ensure railways are held accountable without creating unnecessary legal risk. The penalty regime will be fast, efficient, and inexpensive for shippers. I fully expect that the railways will want to avoid these penalties, so they will respect the imposed terms of service.

Now I would like to address certain points that were raised during the debate at second reading.

Some people fear that once this legislation is adopted, shippers who already have an agreement with a railway company will not be able to use arbitration before this contract is enforced.

Shippers and railway companies have entered into these agreements voluntarily, based on certain commercial expectations. Therefore it would be unfair to change the rules of the game for agreements that have already been signed. These agreements will eventually expire, and at that point, the shippers will be able to use arbitration if necessary, as laid out in Bill C-52.

Moreover, in regards to the transportation of goods to the U.S.A., Bill C-52 would cover the Canadian portion of shipments to the U.S.A. However, it would not seek to broaden the agency's jurisdiction in order to cover railway activities in the United States.

We have a different railway regulatory system than the United States. Expanding the scope of Canadian laws to include the United States would cause problems and compromise Canada-U.S. relations. Furthermore, American carriers operating in Canada would strongly oppose such an idea. Essentially, we must respect American jurisdiction just as the United States respects ours.

I've also heard concerns that there is no commercial dispute resolution mechanism established in Bill C-52.

By definition, you cannot use legislation to impose a commercial process. This bill outlines an arbitration process to resolve disputes once commercial options have failed. What the parties agree to do commercially is entirely up to them. Nothing in the bill prevents them from coming up with their own commercial dispute resolution process.

Shippers are also concerned that it may be too costly for them to use the arbitration process. This bill limits the costs that the government can control. The arbitration process has been limited to 45 days, in part to keep costs down. For the other costs, shippers may wish to enlist lawyers and experts to assist them in the arbitration process, but they control the use of such services.

It is also important to highlight that nothing in the bill diminishes the existing common carrier obligation that railways have had for over 100 years under section 113 of the act. The new arbitration process that will be established by Bill C-52 complements the existing provisions in the act.

In conclusion, when we made a commitment to table this bill, we clearly indicated that its emphasis would be on the service. The shippers supported this approach, and when it was being drafted, they did not ask for the rates to be included. The legislation lays out other measures that allow shippers to address rates and fees if the shippers believe that they are unfair.

Bill C-52 is complementary to other remedies. All of the measures in the bill will offer shippers the clarity, predictability and reliability that they need to succeed. That is what they have told us.

To quote the position of the Coalition of Rail Shippers, “Bill C-52 meets the fundamental requests of railway customers for commercial agreements.” Similarly, Pulse Canada, which represents pulse farmers, notes that the legislation will help them ensure that they are “seen in markets around the world to be reliable, consistent suppliers”.

We must act so that our rail freight system is well positioned to support economic growth, resource development, and our government's ambitious domestic and international trade agenda. We need Bill C-52 to ensure more predictable service to shippers, who help fuel our economy, farmers, who sell grain on the international markets, lumber mills, looking to expand sales overseas, and mineral producers, who ship products such as potash and coal.

Railways and shippers depend on each other to succeed. Since the rail freight service review has been launched, we have seen improvements in rail service in Canada. I commend the railways for working with shippers to negotiate for more service contracts. This bill is about solidifying and building upon those important gains.

Mr. Chair, for generations, agriculture and natural resources have created jobs and growth throughout Canada. To harness this potential and build for future growth, we need a strong rail freight system. I call all members of Parliament to support Bill C-52 without delay, so that these proposed measures will help achieve that goal.

I thank you and the committee for your time this afternoon.

Mr. Chair, thank you for your attention. My team and I will be pleased to answer any questions from the committee members.

Thank you very much, Mr. Chair.

[The Chair, Conservative, Larry Miller]

Thank you very much, Mr. Minister.

With no further ado, we'll turn it over to Ms. Chow, for seven minutes.

[Olivia Chow, NDP, Trinity—Spadina, ON]

Thank you. I will share some time with my colleague later on.

Normally if a company breaks a contract, the penalty for this company would, if the customer is right, go to the customer. Then why is it, under this bill, the service penalties for non-compliance would be kept by the government and not the customer? Why would the customer complain if they can't get any financial compensation?

Second, why doesn't this bill cover existing service agreements? For the new agreement, why isn't there a template or a model agreement so that it's easier for customers to get started?

Finally, aside from service, the price that's being charged is also a huge concern for shippers across the country. Do you plan to do a full railway grain transportation costing review?

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

Mr. Chair, first of all to break a contract, we need one. That's what the bill wants to have for shippers. We want to give all shippers in Canada the opportunity to have a contract with railways that respects both parties. That's what we are doing now.

For years some shippers wanted to have a contract with railways, and they were not able to, but we have to thank and congratulate the railways. Since we have started this process, they have done a lot to have agreements with shippers. They already have done a lot. They have done that since we began this process. That's why we are very proud of what we are proposing here.

With this bill we want only one winner, the Canadian economy. We don't want to side with shippers or railways. We only want to give to the Canadian economy the tool it needs to have a better and bigger growth and to help both of them.

That's why in this process we have all tried to find a better solution for shippers and railways. That's why we have the template and all the rest. We want to have a balanced approach, and that's what we have done. Our department is already reviewing all the aspects for grain transportation, and we will come back later with the information about that.

[Olivia Chow, NDP, Trinity—Spadina, ON]

Why then would the government keep the penalties? Normally if I have a problem with my service contractor, Rogers, and Rogers breaks the service agreement, if there is a financial penalty, I as the customer would keep the penalty. Why would the government keep the penalty money? This is not a cash cow. The money belongs to the shippers, because it's their grains that are not being delivered on time, or they received no notification of a change of service. Why would the government keep the penalties? I don't understand.

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

As I said in my speech, we have some legal challenges with that. We happen to have a lawyer with us who works for the department. I will ask Alain to give you more legal details about that.

[Alain Langlois, Senior Legal Counsel, Team Leader Modal Transportation Law, Department of Transport]

First of all, we have to establish the difference between a penalty and damages in the contractual world.

When you're looking at a punishment that you want to impose on somebody for failure to comply with an obligation that exists, that's what we call a penalty.

Money that is paid to one party as a result of another party's failure to comply with an obligation, which is aimed at compensating that party for the loss or the damage that party suffers, is damage.

What has been put in this legislation is the first thing, the penalty that is destined to punish the railway if they don't comply.

Throughout the consultation the government has had with the shippers, they have expressed strong concern that we as a government not affect their ability to sue for the actual damages resulting from a breach of obligations by the railway.

Normally in a commercial contract, the parties will agree on a predetermined amount of damages that may be payable by one to the other in the case of a breach. That is called a penalty clause in contract, but that's not what this bill does. This bill addresses the first point, which is the actual penalty.

I'll stop there.

[The Chair, Conservative, Larry Miller]

Mr. Aubin, you have about two minutes.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

I have two quick questions.

Approximately 80% of users were dissatisfied with the services. As a result, I imagine that a lot of $100,000 fines will end up in the government coffers. Will this money go directly into the consolidated revenue fund? Has anyone considered creating a fund dedicated to developing transportation in Canada?

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

You had two questions. You asked the first one but I am waiting for the second one. Would you like me to answer the first question? You won't have time to ask your second question, Mr. Aubin.

[Robert Aubin, NDP, Trois-Rivières, QC]

The second question is about the agreements. Unless I am mistaken, this same 80% of users cannot sign these new contracts before their existing contracts have expired. On average, how many years will it be before these contracts can be renegotiated?

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

These are private agreements between the shippers and the railways. We are introducing this legislation in order to encourage these agreements. Therefore we will respect contracts that have already been signed. Our objective is to promote commercial agreements between the shippers and the railways.

Earlier in my presentation, I said that we hope that this legislation would never have to be used. I also mentioned that, since this process started a few years ago, we must acknowledge that the railways have considerably improved their services. We hope that these new measures never have to be enforced.

The money will go into a specific fund. I might ask Annette Gibbons to provide you with further details.

Mr. Aubin, the government's objective is to provide shippers and railways with a commercial agreement. We definitely do not want this to be a means of generating income for the Canadian government. As Mr. Langlois was explaining earlier, our greatest challenge is the legal aspect.

Ms. Gibbons can now tell you about the fund.

[Annette Gibbons, Director General, Surface Transportation Policy, Department of Transport]

The money will in fact go into the federal government's consolidated revenue fund. This is a feature of all administrative penalty systems, as stipulated by law. This system is no different. We want to encourage railway companies to respect these agreements. Arbitration will ensure this. In this context, the objective is to ensure that these agreements are respected, not to make money for the government. As I said earlier, one of the features of this system is that the money will go into the federal government coffers.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

[The Chair, Conservative, Larry Miller]

Thank you very much.

We'll now move to Mr. Goodale for seven minutes.

[Ralph Goodale, Liberal, Wascana, SK]

Thank you, Mr. Chairman.

Could I just pick up on that last point about the difference between the penalties that would go into the fund and the issue of damages for deficient performance by the railways? I take it Mr. Langlois is saying that the fact that a railway may have a penalty applied to it would not impair the shipper's ability to sue for damages if they thought there was a case to pursue, and the damages would go to the shipper if they were successful in the legal action.

[Alain Langlois]

That's right.

[Ralph Goodale, Liberal, Wascana, SK]

I just wanted to confirm that point.

Minister, I—

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

This bill is to have an agreement between the shippers and the railways, and when the government signs, they have to respect it after that, and they can....

[Ralph Goodale, Liberal, Wascana, SK]

Yes.

Minister, as I think you know, I've been anxious to see this legislation for quite some time, and obviously now that it's in committee I want to see it progress as quickly as possible through this part of the legislative process. But I'm also anxious to ensure that when we get to the point of hearing shippers as witnesses before the committee, they will have a full opportunity to explain, if they see any deficiencies in the legislation, where those deficiencies might be. Perhaps they will make recommendations for amendments, and I hope the government will be receptive to constructive ideas on where this legislation might be improved.

Could I ask you about the nature of the SLAs, the service level agreements? The shippers were quite clear, over a long period of time, that there were six things they wanted to see in those agreements, not to prescribe what the precise terms would be, but the subject heads would need to be in the agreements. One of those would be a description of the services and obligations. The second would be communications protocols to describe how the parties talk to each other. Third would be performance standards. Fourth would be performance metrics. Fifth would be consequences for non-performance, which is a part of the subject we were just discussing. Sixth would be a dispute resolution mechanism.

Can you confirm, Minister, with the possible exception of the last one, which you referred to in your opening remarks, that the other subject heads will be in the kinds of agreements that would be arbitrated by the CTA, with those subject heads covered?

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

Okay. I'm very happy to hear that you are very interested in this bill. I know that shippers have been waiting for this bill for years. I know that you were in government for 13 years before our arrival, and I'm very happy to hear that you're still very interested in this bill. We'll continue to work very hard on it.

But to let you know, we want to leave space in the agreements. If we are too tight.... We don't want one-size-fits-all for all the agreements. That way, the shipper will ask the railway what they want to have in their agreement, and if they have a deal, that will not go to the arbitrator. That's why we don't want to define exactly what will be in the deal, because we will let both parties decide what will be in the agreement. We will respect that and we'll continue to support that. If they don't have a deal, at that time the arbitrator will be there to be the referee. For that, we want to leave space for the arbitrator and not be too tight on things.

[Ralph Goodale, Liberal, Wascana, SK]

I don't think the shippers, Minister, have ever said that the legislation or the regulations should prescribe all of the terms of the agreements, but they wanted the assurance that those agreements would at least cover off the areas that were important to a good commercial relationship.

You've mentioned that you have reservations about a dispute resolution mechanism. We can come back to argue that one another time, but what of the other subject areas would you have an objection to? Services and obligations, communications protocols, performance standards, performance metrics, and consequences for non-performance: why wouldn't those areas logically fit within the parameters of a service level agreement? Also, why would a railway object to such logical things being there?

[Denis Lebel, Conservative, Roberval—Lac-Saint-Jean, QC]

The elements can be included in the arbitrator's decision and service, and framed broadly, to cover any rail service issue, including most all the items shippers ask for, except for penalties in the commercial dispute resolution process. They can be in.

[Ralph Goodale, Liberal, Wascana, SK]

Well, I think we'll need to hear the shippers on whether that's an adequate framework. I'm glad that it's permissive in the sense that they can be in, but I think the shippers might want some assurance that those subject areas would be properly covered.

Mr. Chairman, I have one more point about the existing confidential contracts that some shippers may have already negotiated. Those contracts may or may not cover the kinds of things I've just described, and yet, if there is a confidential contract in place, whether or not it's a good one, an effective one, it was obviously negotiated without the benefit of this legislative framework. The particular shipper that has that kind of agreement with the railway would be barred from having access to the arbitration procedure until the existing contract expires.

I wonder if that's a way of rationing access to the CTA so that it's not overwhelmed by applications for arbitration. Or is there some other reason you wouldn't allow the shippers to migrate to a better arrangement, namely, an SLA, rather than remaining locked into an existing agreement that may be deficient? It's important, obviously, to get to the best possible result for everybody. I would think it might be wise to let them go to the CTA if the present contract proves to be insufficient.